5. You are considering investing in a new machine for your processing ant. The purchase price of the machine is $275,000. You will borrow the money over 4 years, paying 10% down, and paying off the rest with annual payments at 6% interest. The machine will generate positive after-tax cash flows to your operations of $80,000 for each of the 5 years it is in service, and at the end you will be able to sell it for $10,000. To get the machine up and running in your factory, you will have pay a $1200 delivery charge, and spend $3500 to adapt your building's wiring and connect it. It will also cost $12,600 to train your operators. At the end of the 3rd year, you will need to pay $20,000 for a machine upgrade/rebuild. Your firm's marginal tax rate is 34%, and its WACC is 16.5%. a. Determine the loan details. Down Pmt: 27,500; Principal: 247,500; Ann Pmt: 71,426.39 b. How much interest will you end up paying on the machine loan? 38,205.56 c. What are the total startup costs for this project (all the present time cash flows)? 44,800 d. Draw a timeline for this project and include every cash flow. e. Use MIRR to determine whether you should invest in this machine. 19.978%, Yes f. What is the NPV and what does it mean? 8242.64, amount shareholder wealth increases... g. What is the PI and what does it mean? 1.184
5. You are considering investing in a new machine for your processing ant. The purchase price of the machine is $275,000. You will borrow the money over 4 years, paying 10% down, and paying off the rest with annual payments at 6% interest. The machine will generate positive after-tax cash flows to your operations of $80,000 for each of the 5 years it is in service, and at the end you will be able to sell it for $10,000. To get the machine up and running in your factory, you will have pay a $1200 delivery charge, and spend $3500 to adapt your building's wiring and connect it. It will also cost $12,600 to train your operators. At the end of the 3rd year, you will need to pay $20,000 for a machine upgrade/rebuild. Your firm's marginal tax rate is 34%, and its WACC is 16.5%. a. Determine the loan details. Down Pmt: 27,500; Principal: 247,500; Ann Pmt: 71,426.39 b. How much interest will you end up paying on the machine loan? 38,205.56 c. What are the total startup costs for this project (all the present time cash flows)? 44,800 d. Draw a timeline for this project and include every cash flow. e. Use MIRR to determine whether you should invest in this machine. 19.978%, Yes f. What is the NPV and what does it mean? 8242.64, amount shareholder wealth increases... g. What is the PI and what does it mean? 1.184
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 16P
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U2
Transcribed Image Text:5. You are considering investing in a new machine for your processing ant. The purchase price of the
machine is $275,000. You will borrow the money over 4 years, paying 10% down, and paying off the rest
with annual payments at 6% interest. The machine will generate positive after-tax cash flows to your
operations of $80,000 for each of the 5 years it is in service, and at the end you will be able to sell it for
$10,000.
To get the machine up and running in your factory, you will have pay a $1200 delivery charge, and spend
$3500 to adapt your building's wiring and connect it. It will also cost $12,600 to train your operators. At the
end of the 3rd year, you will need to pay $20,000 for a machine upgrade/rebuild. Your firm's marginal tax
rate is 34%, and its WACC is 16.5%.
a. Determine the loan details. Down Pmt: 27,500; Principal: 247,500; Ann Pmt: 71,426.39
b. How much interest will you end up paying on the machine loan? 38,205.56
c. What are the total startup costs for this project (all the present time cash flows)? 44,800
d. Draw a timeline for this project and include every cash flow.
e.
Use MIRR to determine whether you should invest in this machine. 19.978%, Yes
f. What is the NPV and what does it mean? 8242.64, amount shareholder wealth increases.....
What is the PI and what does it mean? 1.184
g.
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